UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------------
Commission file number 1-8483
UNOCAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3825062
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2141 ROSECRANS AVENUE, SUITE 4000, EL SEGUNDO, CALIFORNIA 90245
(Address of principal executive offices)
(Zip Code)
(310) 726-7600
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Number of shares of Common Stock, $1 par value, outstanding as of October 31,
1997: 246,527,276
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED EARNINGS UNOCAL CORPORATION
(Unaudited)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
---------------------------------------------
Dollars in millions except per share amounts 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues
<S> <C> <C> <C> <C>
Sales and operating revenues .................................................... $ 1,370 $ 1,265 $ 4,272 $ 3,668
Gain on sales of assets and other revenues ...................................... 27 72 235 275
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues ............................................................ 1,397 1,337 4,507 3,943
Costs and Other Deductions
Crude oil and product purchases ................................................. 524 421 1,616 1,096
Operating expense ............................................................... 423 325 1,076 960
Selling, administrative and general expense ..................................... 26 36 81 104
Depreciation, depletion and amortization ........................................ 300 192 755 617
Dry hole costs .................................................................. 8 53 51 72
Exploration expense ............................................................. 50 33 114 83
Interest expense ................................................................ 37 67 147 215
Property and other operating taxes .............................................. 18 16 54 57
Distributions on convertible preferred
securities of subsidiary trust ............................................... 8 2 24 2
- ---------------------------------------------------------------------------------------------------------------------------------
Total costs and other deductions .......................................... 1,394 1,145 3,918 3,206
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
before income taxes .......................................................... 3 192 589 737
Income taxes (benefit) .......................................................... (174) 58 68 284
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before discontinued
operations and extraordinary item ............................................ $ 177 $ 134 $ 521 $ 453
Discontinued operations
Earnings from operations (net of tax of $22 million and $48 million, respectively) -- 37 -- 80
Loss on disposal (net of tax benefit of $27 million) ......................... -- -- (44) --
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from discontinued operations .............................. -- 37 (44) 80
---------------------------------------------
Extraordinary item
Early extinguishment of debt (net of tax benefit of $14 million) .............. -- -- (38) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net Earnings .................................................................... $ 177 $ 171 $ 439 $ 533
Dividends on preferred stock .................................................... -- -- -- 18
Non-cash charge related to exchange of preferred stock .......................... -- 54 -- 54
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock ................................... $ 177 $ 117 $ 439 $ 461
=============================================
Earnings (loss) per share of common stock assuming no dilution (a)
Continuing operations ........................................................ $ 0.71 $ 0.32 $ 2.09 $ 1.54
Discontinued operations ...................................................... -- 0.15 (0.18) 0.32
Extraordinary item ........................................................... -- -- (0.15) --
---------------------------------------------
Net earnings per common share assuming no dilution ........................ $ 0.71 $ 0.47 $ 1.76 $ 1.86
Earnings (loss) per share of common stock assuming full dilution (b)
Continuing operations ........................................................ $ 0.70 $ 0.31 $ 2.04 $ 1.52
Discontinued operations ...................................................... -- 0.14 (0.17) 0.31
Extraordinary item ........................................................... -- -- (0.14) --
---------------------------------------------
Net earnings per common share assuming full dilution ...................... $ 0.70 $ 0.45 $ 1.73 $ 1.83
Cash dividends declared per share of common stock ............................... $ 0.20 $ 0.20 $ 0.60 $ 0.60
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Weighted average shares outstanding assuming no dilution (in thousands) .... 247,367 248,668 249,153 248,211
(b) Weighted average shares outstanding assuming full dilution (in thousands) .. 262,073 263,525 263,757 262,823
See notes to the consolidated financial statements
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION
September 30 December 31
-------------------------
Millions of dollars 1997 (a) 1996
- --------------------------------------------------------------------------------------------
Assets
Current assets
<S> <C> <C>
Cash and cash equivalents $ 516 $ 217
Accounts and notes receivable 813 1,027
Net assets of discontinued operations -- 1,774
Inventories 154 125
Deferred income taxes 54 57
Other current assets 24 28
- --------------------------------------------------------------------------------------------
Total current assets 1,561 3,228
Investments and long-term receivables 1,081 1,206
Properties (b) 4,688 4,590
Deferred income taxes 19 21
Other assets 108 78
- --------------------------------------------------------------------------------------------
Total assets $ 7,457 $ 9,123
- --------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 664 $ 1,012
Taxes payable 123 231
Current portion of long-term debt and capital lease obligations -- 118
Interest payable 32 70
Current portion of environmental liabilities 73 73
Other current liabilities 83 118
- --------------------------------------------------------------------------------------------
Total current liabilities 975 1,622
Long-term debt 2,078 2,940
Deferred income taxes 166 348
Accrued abandonment, restoration and environmental liabilities 704 677
Other deferred credits and liabilities 607 739
Company-obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust holding solely 6-1/4%
convertible junior subordinated debentures of Unocal 522 522
Common stock ($1 par value) 252 251
Capital in excess of par value 444 412
Foreign currency translation adjustment (13) (13)
Unearned portion of restricted stock issued (34) (14)
Retained earnings 1,929 1,639
Treasury stock - at cost (c) (173) --
- --------------------------------------------------------------------------------------------
Total stockholders' equity 2,405 2,275
- --------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 7,457 $ 9,123
- --------------------------------------------------------------------------------------------
(a) Unaudited
(b) Net of accumulated depreciation and other of: $ 9,863 $ 9,502
(c) Number of shares (in thousands): 4,485 --
See notes to the consolidated financial statements
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED CASH FLOWS UNOCAL CORPORATION
(Unaudited)
For the Nine Months
Ended September 30
----------------------
Millions of dollars 1997 1996
- ------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
<S> <C> <C>
Net earnings $ 439 $ 533
Adjustments to reconcile net earnings to
net cash provided by operating activities
Loss on disposal of discontinued operations (before-tax 71 --
Depreciation, depletion and amortization 755 724
Dry hole costs 51 72
Deferred income taxes (226) 48
Gain on sales of assets (before-tax) (59) (173)
Other (83) 96
Working capital and other changes related to operations
Accounts and notes receivable 221 (23)
Inventories (41) 4
Accounts payable (351) 69
Taxes payable (110) 49
Other 69 (200)
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 736 1,199
Cash Flows from Investing Activities
Capital expenditures (includes dry hole costs) (953) (940)
Proceeds from sale of discontinued operations 1,789 --
Proceeds from sales of assets 55 585
- ------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activiti 891 (355)
Cash Flows from Financing Activities
Long-term borrowings 370 130
Reduction of long-term debt and capital lease obligations (1,329) (690)
Dividends paid on preferred stock -- (27)
Dividends paid on common stock (150) (149)
Repurchases of common stock (173) --
Other (46) 23
- ------------------------------------------------------------------------------------------
Net cash used in financing activities (1,328) (713)
Increase in cash and cash equivalents 299 131
Cash and cash equivalents at beginning of year 217 94
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 516 $ 225
- ------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 178 $ 243
Income taxes (net of refunds) $ 265 $ 239
See notes to consolidatefinancial statements.
</TABLE>
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The consolidated financial statements included herein are unaudited and, in
the opinion of management, include all adjustments necessary for a fair
presentation of financial position and results of operations. All
adjustments are of a normal recurring nature. Such financial statements are
presented in accordance with the Securities and Exchange Commission's
(Commission) disclosure requirements for Form 10-Q.
These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto filed with the Commission in Unocal Corporation's 1996 Annual
Report on Form 10-K (as amended).
Results for the nine months ended September 30, 1997, are not necessarily
indicative of future financial results.
Certain items in the prior year financial statements have been reclassified
to conform to the 1997 presentation.
(2) For the purpose of this report, Unocal Corporation and its consolidated
subsidiary, Union Oil Company of California (Union Oil), together with the
consolidated subsidiaries of Union Oil, are referred to as "Unocal" or "the
company".
(3) Discontinued Operations
On March 31, 1997, the company sold its West Coast refining, marketing and
transportation assets to Tosco Corporation (Tosco). In addition to cash
proceeds of $1.4 billion, the company received 14,092,482 shares of Tosco
common stock valued at $397 million. The value of the stock was based on
the average of the high and low market prices of the Tosco stock for the
last 10 trading days prior to the sale. On May 8, 1997, the company sold
the stock back to Tosco for $394 million (net of expenses).
During the first nine months of 1997, the company recorded an additional
loss on disposal of $44 million (net of a $27 million tax benefit). The
additional provision was primarily due to adjustments in closing inventory
amounts and higher than anticipated termination costs. Included in the $44
million amount is a favorable adjustment of $6 million (net of $4 million
tax) related to a lower than expected first quarter operating loss.
The consolidated earnings statement reflects the results for the refining,
marketing and transportation operations as discontinued operations for the
quarters and nine months ended September 30, 1997 and 1996. At December 31,
1996, the assets had been reclassified in the consolidated balance sheet
from their historical classifications to separately reflect them as net
assets of discontinued operations. Cash flows related to discontinued
operations have not been segregated in the consolidated statement of cash
flows for the 1996 and 1997 periods. Consequently, amounts on the
consolidated earnings statement may not agree with certain captions on the
consolidated statement of cash flows for the 1996 and 1997 periods.
(4) Extraordinary Item
In May 1997, the company purchased approximately $507 million in aggregate
principal amount of three of its outstanding issues of debt securities. The
debt securities consisted of $161 million in debentures with an interest
rate of 9-1/4 percent and $346 million in notes with interest rates of
8-3/4 percent and 9-3/4 percent. The debt securities were purchased for an
aggregate price of $555 million, including a pre-tax premium of
approximately $48 million over their aggregate carrying value. The premium,
together with related costs, was recorded as a extraordinary item on the
company's consolidated statement of earnings.
(5) Other Financial Information
Sales and operating revenues are principally derived from the sale of crude
oil, natural gas, natural gas liquids, geothermal steam, specialty minerals
and nitrogen-based agricultural products produced by the company. Sales and
operating revenues also include amounts received from the sale of purchased
crude oil, natural gas and products. During the third quarters of 1997 and
1996, approximately 29 percent and 30 percent, respectively, of total sales
and operating revenues were attributed to sales of purchased crude oil,
natural gas and products. For the first nine months of 1997 and 1996,
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
approximately 28 percent and 29 percent, respectively, of total sales and
operating revenues were attributed to sales of purchased crude oil, natural
gas and products. Earnings attributable to the sale of purchased crude oil,
natural gas and products were immaterial for the third quarters and first
nine months of 1997 and 1996. Related purchase costs are classified as
expense in the crude oil and product purchases category of the consolidated
earnings statement.
Capitalized interest totaled $10 million and $3 million for the third
quarters of 1997 and 1996, respectively. For the first nine months of 1997
and 1996, capitalized interest was $26 million and $9 million,
respectively.
(6) Income Taxes:
The components of earnings from continuing operations and the provision for
income taxes were as follows:
<TABLE>
<CAPTION>
For Three Months For the Nine Months
Ended September 30 Ended September 30
--------------------------------------------------------
Millions of Dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations
before income taxes
<S> <C> <C> <C> <C>
United States (a) ........................................ $(116) $ 28 $ 204 $ 310
Foreign .................................................. 119 164 385 427
--------------------------------------------------------
Total .............................................. 3 192 589 737
Income Taxes
Current
Federal ................................................... 2 (22) 76 65
State ..................................................... 2 (1) 13 1
Foreign ................................................... 77 70 243 182
--------------------------------------------------------
Total .............................................. 81 47 332 248
Deferred
Federal ................................................... (167) 3 (178) 2
State ..................................................... (7) 7 (5) 18
Foreign ................................................... (81) 1 (81) 16
--------------------------------------------------------
Total .............................................. (255) 11 (264) 36
--------------------------------------------------------
Total income taxes (benefit) ..................... $(174) $ 58 $ 68 $ 284
--------------------------------------------------------
<FN>
(a) Includes corporate and unallocated expenses.
</FN>
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following is a reconciliation of income taxes calculated at the federal
statutory income tax rate to income taxes (benefits) reported in the
consolidated earnings statement:
<TABLE>
<CAPTION>
For Three Months For the Nine Months
Ended September 30 Ended September 30
-----------------------------------------------
Millions of Dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Federal statutory rate: 35% 35% 35% 35%
Earnings from continuing operations
<S> <C> <C> <C> <C>
before income taxes ..................................................... $ 3 $ 192 $ 589 $ 737
Tax at federal statutory rate .............................................. 1 67 206 258
Foreign taxes in excess of (less than) statutory rate (b) .................. (53) (5) (8) 36
Dividend exclusion ......................................................... (3) (3) (10) (11)
U.S. deferred tax adjustment ............................................... (114) -- (114) --
Other ...................................................................... (5) (1) (6) 1
Total ......................................................... $(174) $ 58 $ 68 $ 284
------------------------------------------------
<FN>
(b) The third quarter and first nine months of 1997 included a $68 million reduction in deferred taxes for Thailand.
</FN>
</TABLE>
<TABLE>
<CAPTION>
(7) Inventories
September 30 December 31
-----------------------------------------------------
Millions of dollars 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Crude oil and other petroleum products ............................................. $ 28 $ 12
Agricultural products .............................................................. 33 31
Carbon and Minerals ................................................................ 54 31
Materials, supplies and other ...................................................... 39 51
- ------------------------------------------------------------------------------------------------------------------------------------
Total ....................................................................... $154 $125
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(8) Long Term Debt and Credit Agreements:
Third quarter 1997 financing activities primarily consisted of: the
borrowing of an additional $10 million under the $250 million Thailand
revolving credit facility, increasing the outstanding balance to $160
million, and a payment of $250 million on the $1.2 billion Bank Credit
Agreement, reducing the balance to zero. On October 10, 1997 the company
signed a new Bank Credit Agreement providing a revolving credit facility of
$1 billion through October 2002, at interest rates based on LIBOR and
requiring a facility fee on undrawn commitments. The $1.2 billion Bank
Credit Agreement available on September 30, 1997, which had availability
through June 2000, and the $200 million 364-day credit facility established
in 1995, which had a March 1998 maturity, were both canceled on October 10,
1997.
(9) Financial Instruments
The fair values of the company's financial instruments at September 30,
1997 are described below:
The Deutsche Mark currency swap agreement had a notional value of $110
million and a fair value of approximately $32 million based on dealer
quotes.
The company had outstanding commodity futures contracts covering the sale
of 1,853 thousand barrels of crude oil with a notional amount of $38
million and 8 billion cubic feet of natural gas with a notional amount of
$18 million. The fair values of the contracts, based on quoted market
prices, were insignificant.
The estimated fair value of the company's long-term debt and capital lease
obligations was $2,173 million. The fair values of debt instruments were
based on the discounted amount of future cash outflows using the rates
offered to the company for debt with similar remaining maturities. The
estimated fair value of the mandatorily redeemable convertible
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
preferred securities of the company's subsidiary trust was $638 million,
based on dealer quotes.
(10) Accrued Abandonment, Restoration And Environmental Liabilities:
At September 30, 1997, the company had accrued $495 million for the
estimated future costs to abandon and remove wells and production
facilities. The total costs for abandonments are accrued predominately on a
units-of-production basis and are estimated to be $675 million. This
estimate was derived in large part from abandonment cost studies performed
by an independent firm and is used to calculate the amount to be amortized.
At September 30, 1997, the company's reserve for environmental remediation
obligations totaled $282 million, of which $73 million was included in
current liabilities. The reserve included estimated probable future costs
of $25 million for federal Superfund and comparable state-managed
multiparty disposal sites; $28 million for formerly-operated sites for
which the company has remediation obligations; $81 million for sites
related to businesses or operations that have been sold with contractual
remediation or indemnification obligations; $119 million for company-owned
or controlled sites where facilities have been closed or operations shut
down; and $29 million for sites owned and/or controlled by the company and
utilized in its ongoing operations.
(11) Contingent Liabilities:
The company has certain contingent liabilities with respect to material
existing or potential claims, lawsuits and other proceedings, including
those involving environmental, tax and other matters, certain of which are
discussed more specifically below. The company accrues liabilities when it
is probable that future costs will be incurred and such costs can be
reasonably estimated. Such accruals are based on developments to date, the
company's estimates of the outcomes of these matters and its experience in
contesting, litigating and settling other matters. As the scope of the
liabilities becomes better defined, there may be changes in the estimates
of future costs, which could have a material effect on the company's future
results of operations and financial condition or liquidity.
ENVIRONMENTAL MATTERS
The company is subject to loss contingencies pursuant to federal, state and
local environmental laws and regulations. These include existing and
possible future obligations to investigate the effects of the release or
disposal of certain petroleum, chemical and mineral substances at various
sites; to remediate or restore these sites; to compensate others for damage
to property and natural resources, for remediation and restoration costs
and for personal injuries; and to pay civil penalties and, in some cases,
criminal penalties and punitive damages. These obligations relate to sites
owned by the company or others and are associated with past and present
operations, including sites at which the company has been identified as a
potentially responsible party (PRP) under the federal Superfund laws and
comparable state laws. Liabilities are accrued when it is probable that
future costs will be incurred and such costs can be reasonably estimated.
However, in many cases, investigations are not yet at a stage where the
company is able to determine whether it is liable or, if liability is
probable, to quantify the liability or estimate a range of possible
exposure. In such cases, the amounts of the company's liabilities are
indeterminate due to the potentially large number of claimants for any
given site or exposure, the unknown magnitude of possible contamination,
the imprecise and conflicting engineering evaluations and estimates of
proper cleanup methods and costs, the unknown timing and extent of the
corrective actions that may be required, the uncertainty attendant to the
possible award of punitive damages, the recent judicial recognition of new
causes of action, the present state of the law, which often imposes joint
and several and retroactive liabilities on PRPs, and the fact that the
company is usually just one of a number of companies identified as a PRP.
As disclosed in Note 10, at September 30, 1997, the company had accrued
$282 million for estimated future environmental assessment and remediation
costs at various sites where liabilities for such costs are probable. At
those sites where investigations or feasibility studies have advanced to
the stage of analyzing feasible alternative remedies and/or ranges of
costs, the company estimates that it could incur additional remediation
costs aggregating approximately $190 million.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
TAX MATTERS
In December 1994, the company received a Notice of Proposed Deficiency
(Notice) from the Internal Revenue Service (IRS) related to the years 1985
through 1987. In February 1995, the company filed a protest of the proposed
tax deficiency with the Appeals section of the IRS. Discussions with the
Appeals Officer are ongoing, but it is possible that the most substantial
issues raised in the Notice will proceed to litigation. In an effort to
resolve these issues without litigation, in October 1996, the company and
the IRS entered into an Agreement to Mediate. While the parties have
selected a mediator, no date for the mediation has been set.
The most significant issue raised in the Notice relates to an IRS challenge
of a $341 million deduction taken by the company in its 1985 tax return for
amounts paid under a settlement agreement with Mesa Petroleum, T. Boone
Pickens and Drexel Burnham Lambert, Incorporated, and certain others which
ended a hostile takeover attempt by that group. The IRS contends that the
deduction is not allowable because the payment was related solely to the
purchase of the company's common stock. Although the company purchased
shares under the settlement agreement, it properly reflected the purchase
in its records at the fair market value of the shares purchased. The
deduction at issue relates to that portion of the payment made under the
settlement agreement that exceeded the value of the shares purchased.
The second largest issue raised in the Notice relates to an IRS challenge
of a continued deferral of intercompany gains which arose from sales of
property between subsidiaries in 1982 and 1983. The IRS contends that the
$201 million balance of deferred gain must be recognized in the company's
taxable income for 1985 when the subsidiaries contributed the property to a
wholly-owned master limited partnership.
The total amount of tax and interest that the company would be required to
pay if the IRS were ultimately to prevail on both of the issues described
in the two preceding paragraphs, after application of foreign tax credits
and overpayments related to other issues, and assuming a full disallowance
of the claim for refund discussed below, is estimated at $422 million as of
September 30, 1997.
During the first quarter of 1997, the IRS examination team completed its
review of a claim for refund recently filed by the company relating to its
1985 tax liability. If the company ultimately prevails in its claim for
refund, the liability for the issues described above would be eliminated
and the company would be entitled to a refund for overpayment of tax.
Although the IRS has not formally disallowed the claim, the company has
been informed that the IRS examination team believes the claim should be
disallowed. In April 1997, the IRS examination team sent the issue raised
by the claim to the IRS National Office for technical advice. In September
1997, the IRS examination team withdrew the technical advice request and
returned the claim to the IRS Appeals Officer for further consideration.
The company intends to vigorously defend the claim and dispute the proposed
deficiency and hopes to resolve these matters during 1997. Should that
effort fail, final resolution of these matters is likely to be several
years away as they are not yet before a court.
The company believes it has adequately provided in its accounts for items
and issues not yet resolved. In the opinion of management, a successful
outcome of these matters is reasonably likely. However, substantial adverse
decisions could have a material effect on the company's financial
condition, operating results and liquidity in a given quarter and year when
such matters are resolved.
OTHER MATTERS
The company also has certain other contingent liabilities with respect to
litigation, claims and contractual agreements arising in the ordinary
course of business. Although these contingencies could result in expenses
or judgments that could be material to the company's results of operations
for a given reporting period, on the basis of management's best assessment
of the ultimate amount and timing of these events, such expenses or
judgments are not expected to have a material adverse effect on the
company's consolidated financial condition or liquidity.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(12) Unocal guarantees certain indebtedness of Union Oil. Summarized below is
financial information for Union Oil and its consolidated subsidiaries:
SUMMARIZED FINANCIAL DATA OF UNION OIL
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
--------------------------------------------------------
Millions of dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues ............................................ $ 1,397 $ 1,337 $ 4,507 $ 3,944
Total costs and other deductions
(including income taxes) ............................... 1,211 1,201 3,959 3,488
--------------------------------------------------------------
Earnings from continuing operations ....................... 186 136 548 456
Discontinued operations
Earnings from operations (a) ........................... -- 37 -- 80
Loss on disposal (b) ................................... -- -- (44) --
Extraordinary Item
Early extinguishment of debt (c) ...................... -- -- (38) --
--------------------------------------------------------------
Net earnings .............................................. $ 186 $ 173 $ 466 $ 536
--------------------------------------------------------------
<FN>
(a) Net of tax of: ....................................... $ -- $ 22 $ -- $ 48
(b) Net of tax benefit of: ............................... $ -- $ -- $ (27) $ --
(c) Net of tax benefit of: ............................... $ -- $ -- $ (14) $ --
</FN>
</TABLE>
<TABLE>
<CAPTION>
At September 30 At December 31
-------------------------------------------
Millions of dollars 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets ........................................................... $1,559 $3,228
Noncurrent assets ........................................................ 5,925 5,905
Current liabilities ...................................................... 979 1,622
Noncurrent liabilities ................................................... 3,555 4,704
Shareholder's equity ..................................................... 2,950 2,807
------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
OPERATING HIGHLIGHTS UNOCAL CORPORATION
(Unaudited)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
NET DAILY PRODUCTION
Crude oil and condensate (thousand barrels daily)
United States
<S> <C> <C> <C> <C>
Spirit Energy 76 .......................................... 40.8 51.4 45.0 51.7
Other (a) ................................................. 29.8 34.7 31.5 47.2
----------------------------------------------
Total United States ..................................... 70.6 86.1 76.5 98.9
International
Far East (b) .............................................. 96.2 82.2 94.9 82.4
Other ..................................................... 24.9 27.2 25.9 27.6
----------------------------------------------
Total International ..................................... 121.1 109.4 120.8 110.0
Worldwide .................................................... 191.7 195.5 197.3 208.9
----------------------------------------------
Natural gas (million cubic feet daily)
United States
Spirit Energy 76 .......................................... 844.5 928.4 875.7 917.0
Other (a) ................................................. 109.6 146.8 130.8 164.5
----------------------------------------------
Total United States ..................................... 954.1 1,075.2 1,006.5 1,081.5
International
Far East (b) .............................................. 790.0 666.5 789.5 625.7
Other ..................................................... 54.8 63.0 61.7 71.1
----------------------------------------------
Total International ..................................... 844.8 729.5 851.2 696.8
Worldwide .................................................... 1,798.9 1,804.7 1,857.7 1,778.3
----------------------------------------------
Natural gas liquids (thousand barrels daily) (a) ................ 17.8 19.3 18.7 19.6
Geothermal (million kilowatt-hours daily) ....................... 18.7 21.0 17.2 17.3
----------------------------------------------
(a) Includes production from California upstream properties of:
Crude oil and condensate ..................................... -- 1.0 -- 10.9
Natural gas .................................................. -- -- -- 17.2
Natural gas liquids .......................................... -- -- -- 0.2
(b) Includes host country share in Indonesia of:
Crude oil and condensate ..................................... 27.9 26.4 29.2 26.8
Natural gas .................................................. 21.9 29.1 26.6 26.2
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
OPERATING HIGHLIGHTS (continued) UNOCAL CORPORATION
(Unaudited)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-----------------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
AVERAGE SALES PRICES
Crude oil and condensate (per barrel)
United States
<S> <C> <C> <C> <C>
Spirit Energy 76 ......................... $ 18.27 $ 21.80 $ 20.01 $ 20.33
Other .................................... 13.36 17.37 15.39 16.52
Total United States .................... 16.13 20.01 18.09 18.31
International
Far East ................................. $ 17.45 $ 18.89 $ 18.72 $ 18.32
Other .................................... 16.58 19.89 17.58 18.53
Total International .................... 17.23 19.21 18.41 18.39
Worldwide ................................... $ 16.73 $ 19.62 $ 18.26 $ 18.34
- -----------------------------------------------------------------------------------------------------
Natural gas (per thousand cubic feet)
United States
Spirit Energy 76 ......................... $ 2.31 $ 2.23 $ 2.42 $ 2.34
Other .................................... 1.47 1.36 1.39 1.42
Total United States .................... 2.21 2.09 2.29 2.20
International
Far East ................................. $ 2.39 $ 2.27 $ 2.35 $ 2.23
Other .................................... 2.40 2.05 2.23 1.82
Total International .................... 2.39 2.25 2.34 2.18
Worldwide ................................... $ 2.29 $ 2.15 $ 2.31 $ 2.20
- -----------------------------------------------------------------------------------------------------
AGRICULTURAL PRODUCTS PRODUCTION VOLUMES
(thousand tons)
Ammonia ........................................ 314 360 1,072 1,089
Urea ........................................... 188 275 696 845
Other products ................................. 146 149 494 494
AGRICULTURAL PRODUCTS SALES VOLUMES (thousand tons)
Ammonia ........................................ 187 206 590 574
Urea ........................................... 191 198 690 779
Other products ................................. 200 302 907 971
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and nine month periods ended September 30, 1997 should
be read in conjunction with Unocal's Management's Discussion and Analysis
reported in the 1996 Annual Report on Form 10-K (as amended).
Unocal explores for, develops, produces and markets crude oil and natural gas
resources around the world. The company's largest operations are in the Gulf
Coast region of the United States and in Southeast Asia. In addition, Unocal is
the world's leading geothermal energy producer and manufactures and markets
nitrogen-based fertilizers, petroleum coke, graphites, and specialty minerals.
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------------
Millions of Dollars ` 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reported net earnings .............................................. $ 177 $ 171 $ 439 $ 533
Special items:
Bangladesh well blowout ........................................ -- -- (7) --
UNO-VEN restructuring .......................................... -- -- 39 --
Deferred tax adjustments ....................................... 185 -- 192 --
Impairment of long-lived assets (SFAS No. 121) ................. (39) -- (39) --
Litigation provisions .......................................... (20) (20) (25) (32)
Environmental remediation provisions ........................... (41) (12) (50) (38)
Asset sales .................................................... (2) 48 30 130
Other .......................................................... -- -- -- (9)
Discontinued operations:
Loss on disposal ............................................ -- -- (44) --
Asset sales and miscellaneous ............................... -- 2 -- 4
Extraordinary item ............................................. -- -- (38) --
------------------------------------------------------
Total special items ............................................. 83 18 58 55
------------------------------------------------------
Adjusted net earnings .............................................. $ 94 $ 153 $ 381 $ 478
------------------------------------------------------
</TABLE>
For the third quarter and first nine months of 1997, adjusted net earnings
reflected lower domestic crude oil and natural gas production, lower average
worldwide crude oil sales prices and higher depreciation, depletion and
amortization (DD&A) expense. Partially offsetting these negative factors were
improved international natural gas and crude oil production, primarily in
Thailand and Indonesia, higher average worldwide natural gas sales prices and
lower interest expense.
EXPLORATION AND PRODUCTION
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
---------------------------------------------------
Millions of Dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Reported net earnings
United States
<S> <C> <C> <C> <C>
Spirit Energy 76 ............................................... $ 6 $ 55 $ 144 $ 215
Other .......................................................... 10 22 42 126
International ..................................................... 128 107 259 245
----------------------------------------------------
Total .......................................................... 144 184 445 586
Special items:
Impairment of long-lived assets (SFAS No. 121) ................... (39) -- (39) --
Deferred tax adjustment .......................................... 68 -- 68 --
Bangladesh well blowout .......................................... -- -- (7) --
Asset sales ...................................................... (1) 40 (15) 114
----------------------------------------------------
Total special items ......................................... 28 40 7 114
----------------------------------------------------
Adjusted net earnings ................................................ $ 116 $ 144 $ 438 $ 472
----------------------------------------------------
</TABLE>
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Compared with the third quarter and first nine months of 1996, adjusted net
earnings for 1997 decreased $28 million, or 19 percent, and $34 million, or 7
percent, respectively. These decreases were due primarily to lower domestic
crude oil and natural gas production, higher worldwide DD&A expense and lower
average worldwide crude oil sales prices. Partially offsetting these negative
factors were increased natural gas and crude oil production in the Far East and
higher average worldwide natural gas sales prices.
During the third quarter and first nine months of 1997, domestic crude oil
production decreased 18 percent and 23 percent, respectively, and domestic
natural gas production decreased 11 percent and 7 percent, respectively. These
decreases were due primarily to natural declines, hurricane related shut-ins,
mechanical problems in some high output wells and delays in the drilling
program. Higher international production, principally from Thailand and
Indonesia, partially offset the domestic production declines. During the third
quarter and first nine months of 1997, international crude oil production
increased 11 percent and 10 percent, respectively, and international natural gas
production increased 16 percent and 22 percent, respectively.
Adjusted worldwide DD&A expense for the third quarter and first nine months of
1997 increased 26 percent and 17 percent, respectively, due primarily to
negative reserve adjustments in the United States and Thailand, increased
production from higher rate fields in the United States, higher production in
Thailand and higher capital spending in Indonesia.
Compared with the third quarter of 1996, average worldwide crude oil sales
prices decreased from $19.62 to $16.73 per barrel, a 15 percent decrease.
Average worldwide crude oil sales prices for the first nine months of 1997 were
essentially unchanged from the same period in 1996. For the third quarter of
1997, average worldwide natural gas sales prices increased from $2.15 to $2.29
per thousand cubic feet (mcf), and for the first nine months of 1997, average
worldwide natural gas sales prices increased from $2.20 to $2.31 per mcf.
Special items for the third quarter of 1997 primarily consisted of a $39 million
write-down for the impairment of long-lived assets and a $68 million reduction
in deferred taxes for Thailand related to recent currency devaluations. Special
items for the first nine months of 1997 also included a $7 million charge
related to a gas-ignited exploration well blowout in northeast Bangladesh and a
$17 million loss on the sale of the company's United Kingdom operations.
GEOTHERMAL OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-----------------------------------------------------------
Millions of Dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reported net earnings ...................................... $ 6 $ 6 $25 $15
Special items:
Deferred tax adjustments ................................ 3 -- 10 --
---------------------------------------------------------
Adjusted net earnings ...................................... $ 3 $ 6 $15 $15
---------------------------------------------------------
</TABLE>
Compared with the third quarter of 1996, the decrease in adjusted net earnings
were the result of decreased revenues in the Philippines due to the deferral of
60 percent of the revenues and related earnings pending the settlement of a
dispute regarding extension of the company's service contract and foreign
exchange losses, primarily in Indonesia. Partially offsetting these negative
factors was higher steam generation in Indonesia. During the first nine months
of 1997, adjusted net earnings reflected higher steam generation in all areas of
operation, decreased dry hole expense in Indonesia and lower depreciation
expense due to the sale of domestic geothermal assets in 1996. Offsetting these
positive factors were the negative factors previously discussed for the third
quarter of 1997.
During the third quarter and first nine months of 1997, the company recorded a
$3 million deferred tax benefit for exploration expenses incurred for a project
in Japan. In 1997, the company also recorded a $7 million deferred tax benefit
related to prior year exploration expenses incurred for the Sarulla project in
Indonesia.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
DIVERSIFIED BUSINESS GROUP
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------------------------------------------
Millions of Dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Reported net earnings
<S> <C> <C> <C> <C>
Agricultural Products ....................................... $ 4 $ 20 $ 50 $ 73
Carbon and Minerals ......................................... 10 13 76 40
Pipelines ................................................... 16 14 46 51
Other ....................................................... -- 3 37 9
-------------------------------------------------------
Total ....................................................... 30 50 209 173
Special items:
UNO-VEN restructuring (Other) ............................... -- -- 39 --
Carbon and Minerals (asset sales) ........................... -- -- 41 --
Pipelines (asset sales) ..................................... -- -- -- 7
-------------------------------------------------------
Total special items ......................................... -- -- 80 7
-------------------------------------------------------
Adjusted net earnings .......................................... $ 30 $ 50 $129 $166
-------------------------------------------------------
</TABLE>
Compared to the third quarter and first nine months of 1996, adjusted net
earnings decreased 40 percent and 22 percent, respectively, principally due to
lower agricultural products sales prices, sales volumes and production.
Agricultural products production was lower as a result of maintenance at the
Kenai, Alaska facility, mechanical problems and market related urea production
cuts. Decreased demand in China for nitrogen fertilizers, particularly urea,
impacted both agricultural products sales volumes and sales prices beyond normal
seasonal declines. Lower lanthanide margins, primarily due to price cutting by
China, and the elimination of earnings attributable to the UNO-VEN restructuring
and the sale of the Unocal Hydrocarbon Sales business also impacted the
Diversified Business Group's results.
CORPORATE AND UNALLOCATED
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
---------------------------------------------------------
Millions of Dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Reported net earnings effect
<S> <C> <C> <C> <C>
Administrative and general expense .......................... $ (13) $ (21) $ (40) $ (55)
Net interest expense ........................................ (19) (37) (84) (135)
Environmental and litigation expense ........................ (65) (37) (86) (84)
New Ventures ................................................ (1) (7) (23) (13)
Other ....................................................... 95 (4) 75 (34)
---------------------------------------------------------
Total ....................................................... (3) (106) (158) (321)
Special items:
Environmental and litigation provisions ................... (61) (32) (75) (70)
Asset sales (Other) ....................................... (1) 8 4 9
Deferred tax adjustment (Other) .......................... 114 -- 114 --
Miscellaneous (Other) ..................................... -- -- -- (9)
---------------------------------------------------------
Total special items ......................................... 52 (24) 43 (70)
---------------------------------------------------------
Adjusted net earning effect .................................... $ (55) $ (82) $(201) $(251)
---------------------------------------------------------
</TABLE>
Compared with the third quarter and first nine months of 1996, net interest
expense decreased 49 percent and 38 percent, respectively, as a result of
increased capitalized interest and a decreased debt level. Included in the
Corporate and Unallocated Other category for the third quarter and first nine
months of 1997 was a $7 million charge for a reinsurance obligation that was the
result of a platform fire in Indonesia. For the third quarter and first nine
months of 1997, the company reported a special item of $114 million for a
reduction of deferred taxes related to the reassessment of the company's
exposure for pending federal income tax appeals.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
DISCONTINUED OPERATIONS
During the first nine months of 1997, the company recorded an additional loss on
disposal of its West Coast refining, marketing and transportation operations of
$44 million (net of a $27 million tax benefit). See Note 3 to the consolidated
financial statements for additional information.
FINANCIAL CONDITION AND CAPITAL EXPENDITURES
For the first nine months of 1997, cash flow from operating activities,
including working capital changes, was $736 million, compared with $1,199
million in 1996. During the first nine months of 1997, the discontinued
refining, marketing and transportation operations had a negative cash flow of
$20 million, compared with a positive cash flow of $244 million for the same
period in 1996. The 1997 cash flow from operations also reflected an $81 million
escrow payment related to the settlement of the "Catacarb" litigation and $27
million for the company's buy-out of environmental liabilities related to the
UNO-VEN partnership restructuring. Also impacting cash flow from operations were
lower domestic crude oil and natural gas production, higher international
exploration expense and lower agricultural products prices. Partially offsetting
these negative factors were higher international crude oil and natural gas
production, higher average worldwide natural gas sales prices, and lower net
interest expense.
Proceeds from asset sales were $1,844 million for the first nine months of 1997.
The amount consisted of: $1,789 million from the sale of the West Coast
refining, marketing and transportation assets; $25 million for Unocal
Hydrocarbon Sales, $6 million from the sale of one of the company's airplanes,
$12 million for miscellaneous real estate properties and $12 million from the
sale of miscellaneous assets including various oil and gas properties.
Capital expenditures for the first nine months of 1997 totaled $953 million, an
increase of $13 million from the 1996 level of $940 million, due primarily to
increased international oil and gas activity. The company's preliminary capital
expenditure plan for 1998 could be as much as $1.5 billion, up from an estimated
$1.4 billion in 1997. The exploration capital spending program for 1998 is $568
million, up more than 50 percent from the estimated 1997 level. During 1998, the
company expects to drill more than 189 exploration wells.
Consolidated working capital at September 30, 1997 was $586 million, a decrease
of $1,020 million from the year-end 1996 level of $1,606 million. Included in
the 1996 amount was $1,774 million in net assets of discontinued operations. The
decline in working capital reflects primarily the application of proceeds from
the sale of these assets to the debt reduction described below, as well as the
company's repurchase of the $200 million undivided interest in pool trade
receivables, which it had previously sold.
The company's total debt was $2,078 million at September 30, 1997, a decrease of
$980 million from the year-end 1996 level of $3,058 million. The debt-to-total
capitalization ratio decreased to 42 percent from 52 percent at year-end 1996.
The company used a portion of the proceeds from the sale of its West Coast
refining, marketing and transportation assets to reduce long term debt. See
Notes 8 and 9 to the consolidated financial statements for related information.
Through September 30, 1997, the company had repurchased approximately 4.5
million shares of common stock for a total cost of approximately $173 million.
As of November 7, 1997, the company repurchased approximately 1.6 million
additional shares of common stock for a cost of approximately $65 million.
ENVIRONMENTAL MATTERS
At September 30, 1997, the company's reserves for environmental remediation
obligations totaled $282 million, of which $73 million was included in current
liabilities. During the third quarter, cash payments of $19 million were applied
against the reserve and an additional $67 million in liabilities were recorded
to the reserve account, primarily due to changes in estimated future remediation
costs as discussed below. The company also estimates that it could incur
additional remediation costs aggregating approximately $190 million, as
discussed in Note 11 to the consolidated financial statements. The company's
total environmental reserve is grouped into the following five categories:
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESERVE SUMMARY
September 30,
Millions of Dollars 1997
- --------------------------------------------------------------------------------
Superfund and similar sites ................................. $ 25
Former company-operated sites ............................... 28
Company facilities sold with
retained liabilities ...................................... 81
Inactive or closed company facilities ....................... 119
Active company facilities ................................... 29
----
Total reserves ........................................... $282
----
At year-end 1996, Unocal had received notification from the U.S. Environmental
Protection Agency that the company may be a potentially responsible party (PRP)
at 39 sites and may share certain liabilities at these sites. In addition,
various state agencies and private parties had identified 37 other similar PRP
sites that may require investigation and remediation. During the first nine
months of 1997, 10 sites were added and four sites were resolved resulting in a
total of 82 sites. Of the total, the company has denied responsibility at 6
sites and at another 8 sites the company's liability, although unquantified,
appears to be de minimis. The total also includes 27 sites which are under
investigation or in litigation, for which the company's potential liability is
not presently determinable. At another two sites, the company has made
settlement payments and is in the final process of resolving its liabilities. Of
the remaining 39 sites, where probable costs can be estimated, reserves of $25
million have been established for future remediation and settlement costs. These
82 sites exclude 60 sites where the company's liability has been settled, or
where the company has both no evidence of liability and there has been no
further indication of liability by government agencies or third parties for at
least a 12-month period.
Unocal does not consider the number of sites for which it has been named a PRP
as a relevant measure of liability. Although the liability of a PRP is generally
joint and several, the company is usually just one of several companies
designated as a PRP. The company's ultimate share of the remediation costs at
those sites often is not determinable due to many unknown factors as discussed
in Note 11. The solvency of other responsible parties and disputes regarding
responsibilities may also impact the company's ultimate costs.
The company is subject to a number of federal, state and local environmental
laws and regulations, including the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, and the Resource
Conservation and Recovery Act (RCRA). Under these laws, the company is subject
to possible obligations to remove or mitigate the environmental effects of the
disposal or release of certain chemical and petroleum substances at various
sites.
Corrective investigations and actions pursuant to RCRA are being performed at
the company's Beaumont, Texas, facility, its closed Colorado shale oil project,
and its Washington, Pennsylvania, facility. The company also must provide
financial assurance for future closure and post-closure costs of its
RCRA-permitted facilities. Because these costs will be incurred at different
times and over a period of many years, the company believes that these
obligations are not likely to have a material adverse effect on the company's
results of operations or financial condition.
On May 14, 1997, a draft environmental impact report (EIR) prepared by a
consultant to the County of San Luis Obispo, California, was issued for use by
the County, the Regional Water Quality Board -- Central Coast Region and others
in evaluating the company's proposed remedial action plan, as well as
alternative courses of action, for remediation of the underground petroleum
hydrocarbon contamination at Avila Beach, California, resulting from former
company operations. The company reviewed the alternatives addressed therein
versus the expected environmental benefits, and issued comments in this regard
as well as comments on other procedural and substantive issues subject to
appeal. The county accepted public comments on the draft EIR for a 60-day period
through July 14, 1997. These comments will be used to determine the final EIR.
On August 25, 1997, the County of San Luis Obispo issued a draft EIR on the
company's remediation and abandonment plans for the Guadalupe Oil Field located
on the central coast of California. The field is contaminated with diluent, a
kerosene-like additive used in the company's former operations at the site. The
draft EIR will allow the company, the general public, the county and other
regulatory agencies to evaluate the company's proposed remediation and
abandonment plan, as well as
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
alternative courses of action, for the field. Certain of the alternatives
addressed in the draft EIR would, if implemented, result in significantly higher
remediation costs than the costs for the company's proposed plan. The company
has completed its review of the draft EIR and issued extensive comments to the
county on November 4, 1997.
In the third quarter of 1997, the company added approximately $55 million to the
remediation reserve for the estimated costs of the company's clean-up plans for
Avila Beach, Guadalupe and associated projects. The costs for Avila Beach
include expenses for excavation of the affected sections of the beach;
bioremediation of the town area; development of mitigation projects that will
benefit the community; and decommissioning and dismantlement of storage tanks
that overlook the town. There is a reasonable possibility that the company may
incur additional, but presently indeterminate, expenses for these sites. The
ultimate clean-up costs will be affected by the EIR's, which are expected to be
finalized in early 1998.
See Notes 10 and 11 for related information.
OUTLOOK
Certain of the statements in this discussion, as well as other forward-looking
statements within this document, contain estimates and projections of future
revenues, earnings, cash flows, capital expenditures, assets, liabilities and
other financial items and of future levels of reserves, production, sales
including related costs and prices, and other statistical items; plans and
objectives of management regarding the company's future operations, products and
services; and certain assumptions underlying such estimates, projection plans
and objectives. While these forward-looking statements are made in good faith,
future operating, market, competitive, legal, economic, political,
environmental, and other conditions and events could cause actual results to
differ materially from those in the forward-looking statements.
During the fourth quarter of 1997, the company expects increased operating
earnings due to higher natural gas prices in the United States, improved
agricultural products sales volumes and production and expansion of the Salak
geothermal resource and power plant project in Indonesia.
In 1998, the company expects net worldwide oil and gas production to average
more than 560,000 barrels of oil equivalent (boe) per day, up seven percent from
an estimated 525,000 boe per day in 1997. The company is targeting growth to
more than 700,000 boe per day by 2001.
ASIAN ECONOMIC DOWNTURN
While the economic downturn in Southeast Asia is significant, the company has
experienced no material negative impact as a result of these recent events and
continues to expect no significant financial impact. The company believes the
steps being taken by the affected governments in the region and by international
financial institutions will alleviate the situation. In Thailand, the company's
gas sales contracts provide for adjustments in the event of a devaluation of
more than five percent of the baht in relation to the United States dollar. In
Indonesia and the Philippines, revenues from the company's operations are either
dollar-denominated or indexed to the United States dollar.
UNITED STATES EXPLORATION AND PRODUCTION
In an effort to increase domestic crude oil and natural gas production, the
company expects to increase the number of rigs it employs to 17 during the
fourth quarter of 1997. The company also signed a memorandum of understanding on
September 19, 1997, with Smedvig Offshore Limited for a deepwater drill ship
that can operate in 10,000 feet of water. The drill ship is designed for dual
activity and has capabilities for production testing. The ship is currently
under construction and is scheduled to start drilling operations in late 1998 or
early 1999.
On October 6, 1997, the company discovered oil in Terrebonne Parish, Louisiana.
The discovery well tested at an average daily rate of 1,068 barrels of oil and
3.3 million cubic feet of gas. Production is expected to begin in December 1997,
once the production facilities are completed. The company holds a 40 percent
working interest in the well.
In the Gulf of Mexico, the company recently tested a deepwater oil discovery in
Garden Banks 409 and is currently exploring development alternatives. A
production test on one of these wells drilled on the block wells yielded 7,266
barrels of oil and 3.7
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
million cubic feet of gas per day. The project, called Ladybug, is in close
proximity to existing infrastructure at Garden Banks 189, which will serve as
host facility. The company holds a 50 percent working interest in the project.
INTERNATIONAL EXPLORATION AND PRODUCTION
In Indonesia, the company successfully tested a stepout delineation well
offshore East Kalimantan that establishes significant natural gas and condensate
production potential in the deepwater area of the Mahakam Delta. The well tested
at a rate of 24.8 million cubic feet of gas and 860 barrels of condensate per
day. The company holds a 50 percent working interest in the project.
The company is currently considering the restructuring of certain Canadian oil
and gas assets held by its Unocal Canada, Ltd. subsidiary. The restructuring
could involve an exchange of assets for an equity interest in a publicly traded
Canadian oil and gas company or the formation of an alliance, joint venture or
operating partnership with a Canadian firm. The company's objective is to
enhance the long-term growth and value of its Canadian oil and gas properties.
The $1 billion Yadana natural gas development project remains on schedule for
its August 1, 1998 completion. The onshore Myanmar portion of the pipeline is
essentially completed. Efforts are now focused on the offshore infrastructure,
including a 215 mile pipeline and four platforms. Although the Thai side of the
project has faced challenges, approximately 118 miles of the pipeline has been
installed or is under construction. Construction of the remaining 32 miles
nearest the Myanmar border is expected to begin during the fourth quarter of
1997, with completion scheduled for June 1998. The company has a 28.26 percent
working interest in the project.
In Thailand, the company successfully tested two exploration wells. The wells
are part of a program to evaluate the new Maragot field offshore on Block
B12/26. The company is evaluating development options and expects to bring this
field on-stream following the start-up of production from the Pailin field,
which is scheduled to begin in late 1998. The company holds a 35 percent working
interest in the concession block, which includes the Pailin field.
GEOTHERMAL OPERATIONS
In Indonesia, at the Salak field on the Island of Java, the operation of a new
165-megawatt power plant began in the second week of October when the first of
three 55-megawatt Units came on-line. During the first week of November, Unit 5
began operations and Unit 6 is expected to come on-line in late November. The
company's fourth quarter results will benefit from the start-up of this
165-megawatt power plant.
DIVERSIFIED BUSINESS GROUP
Fourth quarter 1997 results for the Agricultural Products Group are expected to
improve as a result of seasonal increases in demand for agricultural products.
In addition, the company is restructuring its lanthanides business unit in
response to current lanthanides market conditions. This restructuring effort
should result in improved customer focus and product line profitability and
reduced overall operating costs. This restructuring will also result in a
manpower reduction at the company's Mountain Pass facility. The expected
completion of the restructuring is early 1998.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is incorporated by reference the information previously reported in Item 3
of Unocal's Annual Report on Form 10-K (as amended) for the year ended December
31, 1996 (1996 Form 10-K (as amended)) and in Item 1 of Part II of Unocal's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997 (First
Quarter 1997 Form 10-Q) and June 30, 1997 (Second Quarter 1997 Form 10-Q), the
information regarding environmental remediation reserves in Note 10 to the
consolidated financial statements in Item 1 of Part I, the discussion thereof in
the Environmental Matters section of Management's Discussion and Analysis in
Item 2 of Part I, and the information regarding contingent liabilities in Note
11 to the consolidated financial statements in Item 1 of Part I.
18
<PAGE>
PART II - OTHER INFORMATION (continued)
(1) With reference to the action entitled Atlantic Richfield Company, et
---------------------------------
al. v. Unocal Corporation, et al., involving the company's patent for
-------------------------------------
certain compositions of reformulated gasoline, described in Paragraph
(6) of Item 3 of the 1996 Form 10-K (as amended), on October 14, 1997,
following the first phase of a trial which commenced in July 1997, the
jury rendered a verdict upholding the validity of the patent and
finding that Atlantic Richfield Company and the other five oil
companies party to the action had infringed the patent with respect to
approximately 29 percent, or 1.2 billion gallons, of the gasoline
produced by them in California during the five-month period from March
through July 1996 at issue in the trial. On November 3, 1997, following
a second phase of the trial, the jury rendered a verdict awarding the
company damages of 5.75 cents per infringing gallon, or $69 million for
the five-month period. A third phase of the trial, relating to issues
of "inequitable conduct," is scheduled to be heard by the trial judge
commencing in early December 1997.
(2) With reference to the litigation arising from past underground
petroleum pipeline leaks at Avila Beach, California, described in
Paragraph (9) of Item 3 of the 1996 Form 10-K (as amended) and in
Paragraph (3) of Item 2 of Part II of the First Quarter 1997 Form 10-Q,
there are currently 14 lawsuits filed in the California Superior Court
for San Luis Obispo County that have been served on the company.
Thirteen of the suits are individually based, with a total of 107
plaintiffs. The other suit is a purported class action filed by owners
of a local time-share complex. In addition, the California Attorney
General's Office contacted Unocal and held a "pre-filing" meeting to
discuss remediation alternatives, mitigation, penalties and possible
claims for natural resource damages. The Attorney General's Office also
filed a notice of intent to sue based on Resource Conservation and
Recovery Act Section 7002 allegations.
In an effort to resolve property damage and business loss claims by the
local community and discourage additional lawsuits from being filed,
the company has announced a voluntary settlement program for property
and business owners in the town of Avila Beach.
(3) With reference to the litigation involving the Yadana gas project in
Myanmar, described in Paragraph (13) of Item 3 of the 1996 Form 10-K
(as amended), in Paragraph (5) of Item 1 of Part II of the First
Quarter 1997 Form 10-Q, and in Paragraph (2) of Item 1 of Part II of
the Second Quarter 1997 Form 10-Q, several developments have occurred
that may affect the course of the litigation:
In John Doe I, et al. v. Unocal Corp., et al., the court on September
---------------------------------------------
18, 1997, granted in part and denied in part the company's motion to
strike from the plaintiffs' complaint allegations concerning claims of
wrongful taking of property.
The hearing on the plaintiffs' motion for a preliminary injunction
(which seeks to enjoin the company from further participation in the
Yadana gas project) and on the plaintiffs' motion for class
certification is set for December 8, 1997.
Defendant Total's motion to dismiss for lack of personal jurisdiction
remains pending before the court.
In National Coalition Government of the Union of Burma, et al. v.
------------------------------------------------------------------
Unocal, Inc., et al., the company's motion to dismiss was granted in
---------------------
part and denied in part on October 30, 1997.
(4) With reference to the matter entitled Aguilar, et al. v. Atlantic
-----------------------------
Richfield, et al., alleging that the company and other oil company
-------------------
defendants conspired to fix the price of reformulated gasoline in
California in restraint of trade, described in Paragraph (7) of Item 1
of Part II of the First Quarter 1997 Form 10-Q, on October 17, 1997,
the court granted the defendants' motion for summary judgment. Counsel
for the plaintiffs has stated his intention to seek a reconsideration
of the court's decision.
ITEM 2. CHANGES IN SECURITIES
During the third quarter of 1997, the company awarded 5,156 restricted stock
units to certain nonemployee directors pursuant to the terms of the company's
Directors' Restricted Stock Plan. The units were not registered under the
Securities Act of 1933 (the Act) in reliance upon the exemption contained in
Section 4(2) of the Act for transactions by an issuer not involving any public
offering. The units were awarded (1) in consideration of the prior election by
each of the nonemployee directors to
19
<PAGE>
PART II - OTHER INFORMATION (continued)
defer all or a portion of his or her cash fees and (2) upon the credit of
dividend equivalents upon units previously issued. The units are paid out in an
equal number of shares of Unocal common stock at the end of a restriction period
elected by each director, or upon his or her earlier termination of service as a
director.
During the third quarter of 1997, Unocal issued 727 shares of its common stock
upon the conversion of 620 of the 6-1/4 percent trust convertible preferred
securities of Unocal Capital Trust. The common shares were not registered under
the Act in reliance upon the exemption contained in Section 3(a)(9) of the Act
for securities exchanged by the issuer with its existing security-holders
exclusively where no commission or other remuneration is paid or given directly
or indirectly for soliciting such exchange.
ITEM 5. OTHER INFORMATION
Neal E. Schmale resigned as a director of Unocal Corporation effective as of
October 15, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The Exhibit Index on page 23 of this report lists the
exhibits that are filed as part of this report.
(b) Current Reports on Form 8-K
During the third quarter of 1997:
1. Report dated and filed July 23, 1997, for the purpose of
reporting, under Item 5, Unocal's second quarter and first
six months of 1997 earnings and related information.
2. Report dated September 16, 1997 and filed September 17,
1997, for the purpose of reporting, under Item 5, certain
hydrocarbon discoveries offshore Indonesia.
During the fourth quarter of 1997 to the date hereof:
1. Report dated and filed October 14, 1997, for the purpose of
reporting, under Item 5, Unocal's intent to consider the
restructuring of certain Canadian oil and gas assets held by
its Unocal Canada Limited, subsidiary.
2. Report dated and filed October 14, 1997, for the purpose of
reporting, under Item 5, the resignation of Neal E. Schmale
as Unocal's Chief Financial Officer and the appointment of
Timothy H. Ling as Chief Financial Officer, effective
October 15, 1997.
3. Report dated October 14, 1997 and filed October 15, 1997,
for the purpose of reporting, under Item 5, a jury's verdict
validating Unocal's reformulated gasoline patent.
4. Report dated and filed October 27, 1997, for the purpose of
reporting, under Item 5, Unocal's third quarter and first
nine months of 1997 earnings and related information.
5. Report dated November 3, 1997 and filed November 4, 1997,
for the purpose of reporting, under Item 5, damages awarded
to Unocal in the reformulated gasoline patent infringement
lawsuit.
20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNOCAL CORPORATION
(Registrant)
Dated: November 14, 1997 By: /s/ JOSEPH A. HOUSEHOLDER
--------------------------
Joseph A. Householder
Vice President, Tax and Comptroller
(Duly Authorized Officer and
Principal Accounting Officer)
21
<PAGE>
EXHIBIT INDEX
2.1 Sale and Purchase Agreement for 76 Products Company, dated
December 14, 1996, between Union Oil Company of California
and Tosco Corporation (without attachments or schedules)
(incorporated by reference to Exhibit 2.1 to Unocal's
Current Report on Form 8-K dated December 16, 1996 and filed
January 3, 1997, File No. 1-8483).
2.2 Stock Purchase and Shareholder Agreement, dated as of
January 15, 1997, by and between Tosco Corporation and Union
Oil Company of California, together with form of Supplement
No. 1 thereto (incorporated by reference to Exhibit 2.2 to
Unocal's Current Report on Form 8-K dated December 16, 1996
and filed January 3, 1997, File No. 1-8483).
2.3 Amendment No. 1 and Supplement, dated as of March 31, 1997,
to Stock Purchase and Shareholder Agreement, dated as of
January 15, 1997, by and between Tosco Corporation and Union
Oil Company of California (incorporated by reference to
Exhibit C to Unocal's and Union Oil Company of California's
statement on Schedule 13D relating to Tosco Corporation,
dated and filed April 10, 1997, File No. 1-7910).
2.4 Environmental Agreement, dated as of March 31, 1997, by and
between Union Oil Company of California and Tosco
Corporation (without schedules) (incorporated by reference
to Exhibit 2.3 to Unocal's Current Report on Form 8-K dated
December 16, 1996 and filed January 3, 1997, File No.
1-8483).
10 Termination and Employment Agreement and Release among Neal
E. Schmale, Union Oil Company of California and Unocal
Corporation.
11.1 Statement regarding computation of earnings per common share
assuming no dilution for the three months and nine months
ended September 30, 1997 and 1996.
11.2 Statement regarding computation of earnings per common share
assuming full dilution for the three months and nine months
ended September 30, 1997 and 1996.
12.1 Statement regarding computation of ratio of earnings to
fixed charges of Unocal for the nine months ended September
30, 1997 and 1996.
12.2 Statement regarding computation of ratio of earnings to
combined fixed charges and preferred stock dividends of
Unocal for the nine months ended September 30, 1997 and
1996.
12.3 Statement regarding computation of ratio of earnings to
fixed charges of Union Oil Company of California for the
nine months ended September 30, 1997 and 1996.
27 Financial data schedule for the period ended September 30,
1997 (included only in the copy of this report filed
electronically with the Commission).
22
EXHIBIT 10
MATERIAL CONTRACTS
TERMINATION AND EMPLOYMENT AGREEMENT AND RELEASE
This Termination and Employment Agreement and Release ("Agreement"), is
made and entered into as of the Effective Date, as defined herein, by and
between Neal E. Schmale ("Employee"), Union Oil Company of California
("Company") and Unocal Corporation ("Unocal"). The Company and Unocal are
sometimes referred to herein jointly as "Companies".
WHEREAS, Employee has been employed by the Companies or their
affiliates or predecessors for 29.5 years and (i) presently serves as a director
of each of Companies, (ii) was, until recently, employed as Chief Financial
Officer of Unocal, and (iii) is an employee of Company.
WHEREAS, Companies advised Employee of their wish to change his current
assignments and have him resign from his position as a director of Companies and
any positions as director or employee of any of their subsidiaries while
remaining available to act as an employee of each of the Companies in a
consulting capacity, and subsequently, effective October 15, 1998, to have him
resign from his remaining positions as an employee of Companies.
NOW, THEREFORE, in consideration of the mutual promises contained in
this Agreement and other valuable consideration, the sufficiency of which is
hereby acknowledged, Companies and Employee agree as follows:
1. Resignation. Upon execution of this Agreement, Employee will render
--------------
his written resignation from all of his positions as a director of
Companies, effective as of October 15, 1997.
2. Services to be Rendered by Employee on and After Effective Date.
(a) Term of Employment.
------------------
Employee shall be employed by the Companies continuously as a
consulting employee, commencing on the Effective Date and continuing through
October 14, 1998. Such employment may be terminated earlier,
<PAGE>
provided that such termination shall be exclusively in accordance with Section
7(b) of this Agreement.
(b) Duties to be Performed. Upon reasonable written notice by an officer of
--------------------------
the Companies, employee shall make himself available during regular business
hours at Employee's reasonable convenience to perform telephonic consultation on
matters not involving Confidential Information of the Companies, provided that
such telephonic consultation shall not be required of Employee at times which
interfere with Employee's ability to conduct other employment or business
activities. Employee may waive such written notice and telephonic requirements,
provided that any such waiver in one instance shall not constitute a permanent
waiver under this Agreement. In addition, Employee shall make himself available
during regular business hours to provide testimony in litigation to which any of
the Companies is a party, but only to the extent of five hours per month (unless
Employee is otherwise compelled by judicial process) and only to the extent
Employee determines that he could be compelled by judicial process to so
testify. The foregoing requirements to perform limited hours of service per
month shall be non-cumulative and accordingly shall expire at the end of each
month during the term of Employee's employment. The Companies agree to negotiate
in good faith with Employee regarding definition of Employee's duties provided
Companies' rights hereunder are not prejudiced where Employee is presented with
technical obstacles to future employment due to his duties under this Agreement.
(c) Non-Exclusive Employment. Employee may, without restrictions as to
----------------------------
time, place or nature of undertaking, perform services for others during the
term of employment described in Section 2(a) as long as such services do not
compromise Employee's obligations under Sections 5 or 6 of this Agreement.
Following execution of this Agreement, and the Effective Date of same, and
during the term of employment described in Section 2(a),Employee agrees to
inform Companies in writing within 10 days of commencing other employment,
consulting assignments or any other position for which he receives compensation
for his services.
3.Compensation.
---------------
(a) Vacation Accrual, Reimbursement of Fees, and Value of Future Benefits.
---------------------------------------------------------------------------
Simultaneously upon full execution and as a condition to delivery of this
Agreement by the parties hereto,
2
<PAGE>
and Employee's delivery of his written resignations in accordance with Section 1
hereof, Company or Unocal shall deliver to Employee (i) its check made payable
to Employee in the amount of $46,154 (which amount shall be translated to its
hourly equivalency under the Unocal vacation bank and policy and debited from
Employee's vacation bank accrual) less Applicable Withholding, (ii) its check
for $15,000 representing reimbursement of a portion of Employee's legal fees
with Pillsbury Madison & Sutro LLP, less Applicable Withholding, (iii) its check
made payable to Employee in the amount of $75,000 (representing the parties'
agreed upon substitute value of certain welfare plan and fringe benefit coverage
for applicable periods between October 14, 1998 and October 14, 2001), less
Applicable Withholding and (v) its check made payable to Employee in the amount
of $273,171 (representing a payment in lieu of the benefit accruals that would
have occurred in the aggregate under the Unocal Retirement Plan and the
Non-Qualified Retirement Plans had the Employee continued employment through
October 14, 2001 at his present compensation). None of such amounts shall be
deemed compensation for purposes of any Benefit Plan.
(b) Salary. During the term of employment described in Section 2(a),
------
Employee shall receive a salary, payable in semi-monthly installments, of
$400,008 per annum, less Applicable Withholding.
(c) Revised Incentive Compensation Plan. Employee shall receive
----------------------------------------------
distribution of the cash portion of deferred RICP awards made with respect to
years prior to 1998 in accordance with his existing deferral elections on a 100%
vested and non-forfeitable basis. Employee shall receive an RICP award for
calendar year 1997 equal to that which he would have received had his
resignation under Section 1 not occurred. If the RICP is interpreted, modified,
amended or terminated, or the Committee thereunder acts, in a manner which would
result in the foregoing award (after having been rendered in a manner that is
non-discriminatory relative to Employee) being reduced, Employee shall receive a
bonus, less Applicable Withholding, in the amount of such reduction, payable at
the time the RICP award is payable, or would have been payable.
(d) Long Term Incentive Plan of 1991.
--------------------------------
(1) Performance Shares. The parties acknowledge and agree that Employee has
been awarded, under the LTIP, with respect
3
<PAGE>
to the Performance Cycles set forth in Column A below, the number of Performance
Shares appearing to the right of each Performance Cycle in Column B below, and
that under the terms of the LTIP, such Performance Share awards will be
pro-rated as set forth in Column C below, assuming Employee's employment
continues through October 14, 1998:
A. B. C.
Performance Performance Proration
Cycle Share Awards
- --------------------------------------- ----------------------------------------
1994-97 ............................... 6,600 6,000
1995-98 ............................... 7,000 6,635
1996-99 ............................... 7,000 4,885
1997-2000 .............................. 6,000 2,688
The Companies agree that payout of the above referenced awards shall be "at the
convenience of the Company" for purposes of Section 8(d)(i) of the LTIP and the
equivalent section of the Employee's LTIP agreements. Accordingly, the Companies
shall cause the LTIP Committee to make Performance Share payments to Employee
based on the Awards described in Column B above following the close of each
Performance Cycle (in the form and at the time such awards are generally paid)
subject only to the following LTIP variables:
(a) Pro-ration for service under Section 8(d)(i) of the LTIP shall be as
described in Column C above for termination of employment on October 14, 1998;
in the event of an earlier termination of the term of employment described in
Section 2(a), the date of such termination shall not be earlier than the
Effective Date and the pro-ration shall be based on the principles used to
derive Column C above.
(b) The original Performance Share award shall be subject to variation in
accordance with Section 8(b) of the LTIP and the "Peer Group Companies" relative
performance fraction contemplated by the LTIP agreement.
(c) The price of Stock under the LTIP at the end of the Performance Cycle.
(2) Stock Options. The parties acknowledge and agree that Employee has been
------------------
awarded, under the LTIP, with respect to the Option Grants dated as set forth in
Column A below, the number of
4
<PAGE>
non-qualified stock options appearing to the right of each Option Grant in
Column B below, exercisable at the applicable strike price set forth in Column C
below and that under the terms of the Option Grants, such Option Grants become
exercisable in 25% increments over the 3 1/2 years following the Option Grant
date and will therefore be exercisable in the numbers set forth in Column D
below, assuming Employee's employment continues through October 14, 1998:
A B C D
Options
Number Exercisable
Option of Strike on
Grants Options Prices 10/14/98
- --------------------------------------------------------------------------------
3/26/90 ................... 15,344 $ 30.0625 15,344
1/28/91 ................... 12,666 24.3125 12,666
3/30/92 ................... 18,269 20.9375 18,269
3/29/93 ................... 17,917 29.6875 17,917
3/28/94 ................... 22,095 26.3750 22,095
3/27/95 ................... 21,000 28.5000 21,000
3/25/96 ................... 21,000 32.8125 15,750
3/24/97 ................... 19,500 38.8125 9,750
Companies agree that the options described in Column D are vested and
non-forfeitable and shall be exercisable by Employee without restriction until
the earlier of (i) the tenth anniversary of the grant or (ii) the third
anniversary of the termination of the term of Employee's employment under
Section 2(a), provided that (i) prior to September 27, 1998, with respect to the
March 27, 1995 option grant, the number of options exercisable as described in
Column D shall be 15,750, (ii) prior to September 25, 1998, with respect to the
March 25, 1996 option grant, the number of options exercisable as described in
Column D shall be 10,500 and (iii) prior to September 24, 1998, with respect to
the March 24, 1997 option grant, the number of options exercisable as described
in Column D shall be 4,875. In the event of an exercise of an option by Employee
prior to the termination of the term of Employee's employment under Section 2(a)
and payment of all or a portion of the gain on the option in Restricted Stock,
said Restricted Stock shall be immediately 100% vested and non-forfeitable, and
shall be distributed to Employee without restriction, on October 14, 1998.
(3) Restricted Shares. The parties acknowledge and agree that Employee
-------------------
has 16,412 shares of Restricted Stock resulting
5
<PAGE>
from his deferral of a portion of RICP awards, as of October 14, 1997.
Notwithstanding any other provisions of this Agreement, such Restricted Stock
shall be 100% vested and non-forfeitable, and distributed to Employee without
restriction, on the earlier of the termination of the term of employment
described in Section 2(a) or October 14, 1998.
(4) LTIP Rights Vested. The termination of the term of Employee's
-------------------------
employment under Section 2(a) by reason of Section 7(b) shall not modify
Employee's rights under Sections 3(d)(1) through (3).
(e) Expense Reimbursement. Company will reimburse Employee for all
----------------------
reasonable and documented travel and out-of-pocket expenses incurred by Employee
while traveling on behalf of Company when such travel has been authorized in
writing by Company. Companies shall provide Employee with office space,
secretarial assistance acceptable to Employee, office equipment and supplies,
hardwired and cellular telephone service through the earlier of October 14, 1998
or the date Employee is provided an office by a subsequent employer.
(f) Severance Payment. In consideration of 30 1/2 years of employment with
-------------------
the Companies and the promises exchanged in this Agreement, and notwithstanding
any other provision of this Agreement, including without limitation, the date of
termination of the term of Employee's employment under Section 2(a), on October
14, 1998 the Companies shall deliver to Employee a check made payable to
Employee (or in the event of Employee's intervening disability or death, the
trustee of the Schmale Family Trust) in the amount of $1,966,670, less
Applicable Withholding, and its check representing the dollar equivalent of
Employee's accrued vacation hours in the Unocal vacation bank, at his date of
termination of employment.
(g) Waiver. Employee shall not be entitled to any other separation benefits
---------
except as specifically provided in this Section 3. Employee shall not be
eligible for any additional grants under the Long Term Incentive Plan of 1991
after the Effective Date.
4. Benefits.
--------
(a) Participation After Effective Date. On and after the Effective Date,
------------------------------------
and during the term of Employee's employment under
6
<PAGE>
Section 2(a) above, Employee shall be entitled to participate in all Benefit
Plans and fringe benefit and payroll practices of Unocal on the same terms and
conditions as would be applicable were Employee serving, during the term of
employment described in Section 2(a), as Chief Financial Officer of Unocal in
good standing and receiving as compensation the amounts described in Sections
3(b) and 3(c) of this Agreement. For purposes of the preceding sentence, "terms
and conditions" includes Employee making required elections, and Employee's
paying generally applicable employee-side contributions required by a Benefit
Plan to obtain one or more benefits under the Benefit Plan.
(b) Guaranty of Benefits by Companies. If, for any reason, Employee does
----------------------------------
not receive, pursuant to a Benefit Plan, at the time required by such Benefit
Plan, all or any portion of the benefit under such Benefit Plan as contemplated
by Section 4(a), the Companies shall be jointly and severally obligated to
provide the Employee the After Tax Equivalent of the benefit not then received
by the Employee pursuant to the Benefit Plan. The parties agree that the rights
and obligations created under the preceding sentence are contractual rights and
obligations between Employee and the Companies under the law of California, and
not rights and obligations under a Benefit Plan.
(C) Defined Benefit Plans.
----------------------
(1) Qualified Plan. The parties acknowledge and agree that Employee's
---------------
accrued benefit under the Unocal Retirement Plan accrued through October 31,
1997 is $9,722.23 per month (calculated as though Employee terminated employment
on October 31, 1997), and such accrued benefit accrued through October 14, 1998
(assuming Employee's employment through October 14, 1998 and making no allowance
for anticipated increase in the IRC ss. 415 limit) shall also be $9,722.23 per
month (both expressed as a single life annuity for the life of the Employee
commencing on the first day of the first month following Employee's attainment
of age 65), and that such accrued benefits are and shall be 100% vested and
non-forfeitable, and that Employee has the right to elect to receive such
benefit or any alternative form of benefit deemed to be equivalent, and
generally available, under the Unocal Retirement Plan (with applicable spousal
consents) upon the first day of the first month immediately following Employee's
attainment of age 55 (or in the event of Employee's death prior to
7
<PAGE>
retirement, Employee's surviving spouse shall have survivor benefits, in
accordance with the terms of the Unocal Retirement Plan, derived from such
applicable accrued benefits).
(2) Non-Qualified Plans. The parties acknowledge and agree that, assuming
--------------------
the accuracy of the benefits described in Section (c)(1), Employee's aggregate
accrued benefit under the Non-Qualified Retirement Plans accrued through October
31, 1997 is $11,675.91 per month, and such accrued benefit accrued through
October 14, 1998 (assuming Employee's employment through October 14, 1998) shall
be $13,234.03 per month (both expressed as a single life annuity for the life of
the Employee commencing on the first day of the first month following Employee's
attainment of age 65), and that such accrued benefits are and shall be 100%
vested and non-forfeitable, and that Employee has the right to elect to receive
such applicable benefit or any alternative form of benefit deemed to be
equivalent, and generally available, under the Non-Qualified Retirement Plans
(with any applicable spousal consents) upon the first day of the first month
immediately following Employee's attainment of age 55 (or in the event of
Employee's death prior to retirement, Employee's surviving spouse shall have
survivor benefits in accordance with the terms of the Unocal Non-Qualified
Retirement Plans derived from such applicable accrued benefits).
(3) Assumptions in Calculating Retirement Benefits. For purposes of
--------------------------------------------------
calculating Final Average Pay under the Unocal Retirement Plan and the Non
Qualified Retirement Plans, Employee shall be deemed to have received an RICP
award of $200,004 with respect to 1997, notwithstanding the actual amount of
award under Section 3(c).
(d) Special Rules. The parties agree that Employee shall have a "qualifying
-------------
event" under COBRA (consisting of potential loss of group coverage under the
Unocal Medical and Dental Plans by reason of employment termination) at the
conclusion of the term of employment described in Section 2(a). The foregoing
sentence shall not be construed as a waiver of any rights under COBRA by
Employee, Employee's spouse or Employee's dependent children.
(e) Retiree Medical and Re-employment Options. The parties acknowledge and
------------------------------------------
agree that Employee has the right to enroll in the Retiree Medicare Supplement
Coverage under the Unocal Medical Plan at or after attainment of age 65.
Employee shall have the option of
8
<PAGE>
returning as a consulting employee on the regular payroll of the Companies for a
period of three months and at a salary of $30,000 at any time between Employee's
55th birthday and the date Employee attains age 65. If Employee so elects to
return to employment, he shall agree to make himself available for consulting on
a substantially full-time basis. The Companies acknowledge and agree that if
Employee is employed as set forth in this subsection (e), Employee and his
eligible dependents will be eligible upon Employee's subsequent termination of
employment to participate for life in the combination of, first, the Companies'
age 55 to age 65 Retiree Medical Coverage, and thereafter in the Companies'
Retiree Medicare Supplement Coverage under the Unocal Medical Plan, as such
coverages may be amended by amendments of general application, provided that for
purposes of this Section 4(e), any such amendments adopted or effective after
October 14, 1997 shall be disregarded to the extent specifically directed at
Employee or restricting eligibility in a manner which has the effect of
defeating the purpose of this Section 4(e).
In the event Employee is unable to exercise the option described in
this Section 4(e) by reason of disability, Companies shall provide the
equivalent of such retiree medical coverage (including coordinated application
of specific and aggregate benefit limitations) in exchange for Employee's
payment of the then current employee side premiums.
(f) Qualified Defined Contribution Plans. The parties acknowledge and agree
------------------------------------
that Employee's account balances under the Unocal ESOP and Profit Sharing/Saving
Plan are 100% vested and non-forfeitable.
5. Confidential Information. Employee acknowledges that in the course of
-------------------------
carrying out his responsibilities to Companies, he has had fiduciary
responsibilities to Companies and has had access to and has been entrusted with
the confidential and proprietary information and trade secrets of Companies
including, without limitation, information not previously disclosed to the
public regarding current and projected revenues, expenses, costs, profit margins
and any other financial and budgeting information; marketing and distribution
plans and practices; manufacturing processes, formulae, methods and facilities;
research and development; business plans, opportunities, projects and any other
business and corporate strategies; product information including reserves,
exploration and research; terms of
9
<PAGE>
contracts and other arrangements with customers suppliers, agents and employees
of Companies; confidential and sensitive information of record regarding other
employees (other than Employee's personal opinions), including information with
respect to their job descriptions, documented performance strengths and
weaknesses, and compensation; and other information not generally known
regarding the business, affairs and plans of Companies (collectively, the
"Confidential Information"). Employee acknowledges that the unauthorized use or
disclosure of Confidential Information would be detrimental to Companies and
would reasonably be anticipated to materially impair Companies' value. Employee
acknowledges and agrees that such Confidential Information is the exclusive
property of Companies and that he shall not at any time, without the prior
written consent of an authorized officer of Unocal either during his employment
by Companies or after the termination of that employment, directly or indirectly
use for himself or others, or disclose to others, any Confidential Information.
The foregoing shall not apply to information which either (i) is known to
Employee other than as a result of work performed for Companies and from some
authorized source other than Companies, (ii) is or becomes part of the public
domain, other than by Employee's direct or indirect disclosure, or (iii)
consists of explanations of his work experience that are reasonably necessary to
interview for employment. Employee's obligations under this paragraph shall
survive termination of his employment as described in Section 2(a) for a period
of two years from such termination. Employee represents he has made available to
Companies all of his files and materials taken from his Unocal office, and
Companies have had an opportunity to inspect same, and Companies acknowledge
that such files and materials contain no Confidential Information.
6. Change of Control. Employee agrees that during the period commencing on
-----------------
the Effective Date and ended two years after the termination of Employee's
employment as described in Section 2(a), Employee will not directly or
indirectly participate in or assist any person or entity in activities designed
to effectuate, or reasonably likely to result in, a change in control of Unocal
or other extraordinary transaction involving Unocal. The foregoing sentence
shall not be interpreted as preventing Employee from holding a position with an
employer where Employee is "walled off" from any activity prohibited to Employee
under this Section. Without limiting the generality of the preceding sentence,
activities prohibited by this
10
<PAGE>
paragraph 5 include activities designed to effectuate, or reasonably likely to
result in (i) a merger or consolidation involving Unocal, (ii) a sale or other
disposition of all, or a substantial portion of, Unocal's assets, (iii) any
transaction that would require a vote of Unocal's stockholders under Unocal's
Certificate of Incorporation or bylaws or under applicable law, (iv) any person
or entity (individually or as a group within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended) becoming the
beneficial owner of 15% or more of the combined voting power of Unocal's
then-outstanding equity securities or (v) a change in the composition of
Unocal's Board of Directors such that, during any period of two consecutive
calendar years, Continuing Directors (as defined below) cease, for any reason,
to constitute at least a majority of the Board of Directors. For purposes of
this Agreement, "Continuing Directors" shall be the individuals who constitute
the Board of Directors at the beginning of the applicable two-year period
together with new directors whose election by the stockholders was approved by a
vote of at least two-thirds of the directors then in office who either were
directors at the beginning of the applicable two-year period or whose election
was previously so-approved. Employee acknowledges and agrees that in light of
Employee's position and history with Companies and their affiliates and the
circumstances as they exist as of the Effective Date of this Agreement, it would
be impossible for Employee to engage in any of the activities prohibited by this
paragraph 5 without making use of Confidential Information, and the prohibitions
contained in this paragraph 5 are reasonable.
7. Funding, Termination and Remedies.
---------------------------------
(a) Funding. At the option of the Employee, the Companies shall establish
-------
at City National Bank, Beverly Hills, California (the "Trustee") a "rabbi trust"
in a form materially similar to that employed by the Companies for the RICP,
adapted to the purposes of this Agreement. On such formation, the Companies will
fund such Rabbi Trust with cash in the amount equal to the then present value of
the payment described in Section 3(f) discounted at the rate of 9.5% (and with
no other discounts) as determined in good faith by James Warner, F.S.A. of
Towers, Perrin. Distribution shall be accomplished by the Trustee distributing
to Employee amounts necessary to pay the amount due under Section 3(f) above. To
the extent funds remain after satisfying the amount due Employee under 3(f), the
balance of such trust shall be paid to Company. If the amount of the trust is
11
<PAGE>
insufficient to pay said amount, Company shall pay Employee such insufficiency,
less Applicable Withholding. Employee shall bear the cost of the Trustee's fees
and any other expenses of the Rabbi Trust. The assets of the Trust shall be
invested in vehicle jointly approved by the Companies and Employee. Payments to
Employee shall be reduced by any Applicable Withholding.
(b) Termination of Employee. Employee's employment with the companies
------------------------
described in Section 2(a) shall terminate only as a result of one of the
following conditions:
(1) The termination of such employment effective October 14, 1998
pursuant to the first sentence of Section 2(a).
(2) The Employee's material breach of Employee's obligations under
Section 5 or Section 6.
(c) Death or Disability. In the event of the Employee's death or total
--------------------
disability, the entire balance of the Rabbi Trust shall be distributed to the
trustee of the Schmale Family Trust.
(d) Remedies
(1) Damages. The parties agree that the damages according to proof shall be the
-------
remedy at law for breaches hereunder. However, the Companies shall not be
entitled to withhold any payment or portion thereof provided under Section 3 as
an alleged offset against any such claim of damages by the Companies unless (i)
Companies have submitted the issue to arbitration under Section 12 by written
notice given in accordance with the procedures thereunder on or before September
14, 1998 and (ii) after a full evidentiary hearing, the arbitrator determines
that the Companies have such a right of offset as a matter of law and that there
has been a material breach by Employee of Section 6 hereof.
(2) Companies' Equitable Remedies. Employee acknowledges and agrees that
------------------------------
full compliance with his obligations under Sections 5 and 6 are essential to the
Companies, and in the event of any breach or threatened breach by Employee of
Sections 5 or 6 Companies will sustain losses which are impossible to determine
and not fully compensable by monetary damages. Therefore, Company and/or
12
<PAGE>
Unocal shall be entitled to institute and prosecute proceedings in any court of
competent jurisdiction to enjoin any such breach or threatened breach and to
enforce the specific performance of such provisions.
(3) Employee's Equitable Remedies. Companies acknowledge and agree that
-------------------------------
full compliance with their obligations under this Agreement are essential to the
Employee, and in the event of any breach or threatened breach by Companies of
this Agreement, Employee will sustain losses which are impossible to determine
and not fully compensable by monetary damages. Therefore, Employee shall be
entitled to institute and prosecute proceedings in any court of competent
jurisdiction to enjoin any such breach or threatened breach and to enforce the
specific performance of such provisions.
(4) Defense of Validity. The Companies agree to defend the validity of this
-------------------
Agreement in any proceeding which threatens to make this Agreement unenforceable
in any material respect.
8. General Release by Employee. In consideration for this Agreement,
-----------------------------
Employee hereby releases and forever discharges Companies and their respective
predecessors, successors, partners, assigns, employees, shareholders, owners,
officers, directors, agents, attorneys, subsidiaries, divisions, and affiliates
(jointly referred to as "Employee's Released Parties") from any and all claims,
demands, causes of action, obligations, damages, attorneys' fees, costs and
liabilities of any nature whatsoever ("Claims"), whether or not now known,
suspected or asserted, which Employee may have or claim to have against the
Released Parties relating in any manner to Employee's employment with Companies
and/or the termination of such employment, other than those claims arising by
reason of Employee's rights under this Agreement and Benefit Plans of the
Companies under this Agreement, and hereby covenants not to assert any such
released Claims through a lawsuit, an administrative proceeding or otherwise.
This General Release includes, but is not limited to, claims arising under
federal, state or local laws prohibiting employment discrimination or claims
arising out of any legal restrictions on Company's rights to terminate its
employees, including without limitation the Age Discrimination in Employment Act
of 1967, Title VII of the Civil Rights Act of 1964, and the Civil Rights Act of
1991.
Except as specifically provided herein in Section 4 or elsewhere, nothing
in this Section 8 or Section 9 shall affect in any way, apply
13
<PAGE>
to, increase, or diminish, any rights which Employee has with respect to
benefits under Benefit Plans that have accrued and vested as of the Effective
Date. Nothing in this Agreement shall affect in any way, apply to, increase or
diminish, any rights which Employee may have with respect to coverage by
Companies' liability insurance policies, including directors and officers
liability coverages, or Company's or Unocal's defense or indemnification of
Employee during and after his employment with the Companies, or service as an
officer or director thereof for acts or omissions occurring during the term of
his employment with Company or the term of his service as an officer or
director.
9. General Release by Companies. In consideration for this Agreement,
------------------------------
Companies hereby release and forever discharge Employee and his successors,
heirs, spouse, executors, insurers, creditors, administrators, devisees, the
trustee of the Schmale Family Trust, partners, assigns, employees, shareholders,
owners, officers, directors, agents, financial consultants (and specifically
AYCO) attorneys (and specifically, Pillsbury Madison & Sutro LLP), and
affiliates (jointly referred to as "Companies' Released Parties") from any and
all claims, demands, causes of action, obligations, damages, attorneys' fees,
costs and liabilities of any nature whatsoever ("Company Claims"), whether or
not now known, suspected or asserted, which Companies may have or claim to have
against the Companies' Released Parties relating in any manner to Employee's
employment with Companies and/or the termination of such employment (other than
Company Claims arising under this Agreement), and hereby covenants not to assert
any such released Company Claims through a lawsuit, an administrative proceeding
or otherwise.
10. Section 1542 Waiver. Companies and Employee waive all rights under
-------------------
Section 1542 of the Civil Code of California. That section reads as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
Notwithstanding the provisions of Section 1542 or any similar law of
any other state, and to provide a full and complete release of Employee's and
Companies' Released Parties as provided in Sections 8
14
<PAGE>
and 9 hereof, Companies and Employee expressly acknowledge that Sections 8 and 9
of this Agreement are intended to release, without limitation, Claims and
Company Claims which Companies or Employee do not know or suspect to exist in
their or his favor at the time of execution of this document, and that the
settlement agreed upon completely extinguishes all such Claims and Company
Claims.
11. Non-Disclosure of Agreement. Employee shall not disclose terms of this
---------------------------
Agreement to anyone; provided, however, that Employee may disclose the terms and
text of this Agreement in confidence to his spouse, lender,attorneys, tax
advisor, financial advisor, potential employer, or consulting client, or when
required by legal or administrative proceedings. At the time of execution of
this Agreement, Company agrees that it has no knowledge of any improper
disclosure by Employee as such disclosure is referred to in this paragraph.
12. Arbitration. Except for claims for equitable or injunctive relief, the
-----------
parties hereby agree to submit any claim or dispute arising out of the terms of
this Agreement (including exhibits) to private and confidential arbitration by a
single neutral arbitrator. Subject to the terms of this paragraph, the
arbitration proceedings shall be governed by the Commercial Arbitration Rules of
the American Arbitration Association, and shall take place in Los Angeles
County. The arbitrator shall be appointed by agreement of the parties hereto or,
if no agreement can be reached, by the American Arbitration Association pursuant
to its Rules. The decision of the arbitrator shall be final and binding on all
parties to this Agreement, and judgment thereon may be entered in any court
having jurisdiction. All costs of the arbitration proceeding or litigation to
enforce this Agreement, including reasonable attorneys' fees shall be paid to
the prevailing party by the party against whom the arbitrator or court rules.
The parties shall instruct the arbitrator to specify which party is the
prevailing party. Except for claims for equitable or injunctive relief, this
arbitration procedure is intended to be the exclusive method of resolving any
claim relating to the obligations set forth in this Agreement or otherwise
relating in any way to Employee's employment relationship with Companies.
13. Entire Agreement. This Agreement is a full and complete expression of
----------------
the intent of the parties with respect to the subject matter of this Agreement.
No other agreement or representation,
15
<PAGE>
16
<PAGE>
express or implied, has been made by either party with respect to the subject
matter of this Agreement.
14. Amendment. This Agreement may not be modified except by a written
--------
agreement signed by both Employee and by a Vice President of Unocal.
15. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of California without reference to the
conflicts of law provisions thereof.
16. Severability. In the event any provision of this Agreement shall
------------
finally be determined to be unlawful, such provision shall be deemed to be
severed from this Agreement and every other provision of this Agreement shall
remain in full force and effect. If any one or more of the provisions of this
Agreement shall for any reason be held to be excessively broad, it shall be
construed, by limiting and reducing it, so as to be enforceable to the full
extent possible under applicable law.
17. Assignment. Employee warrants and represents that he has not assigned
----------
or in any way transferred any right or claim related to the subject matter of
this Agreement and that he will not allow or assist in such transfer or
assignment in the future. Any purported assignment or transfer shall be deemed
void ab initio.
18. No Admission. This Agreement shall not constitute an admission by any
------------
Released Party of any wrongful action or inaction whatsoever.
19. Voluntariness. Employee agrees that this Agreement is understood by
-------------
Employee and is voluntarily entered into by the Employee.
20. Beneficiary Designation. Employee may file a written beneficiary
------------------------
designation for any payments in the event of his death prior to receipt of the
amounts due under this Agreement in the form of Exhibit A. The last such
designation received by Company prior to his death shall control any such
payments.
21. Employee's Right to Review Agreement. Employee has twenty-two (22) days
------------------------------------
from the date of Employee's receipt of this Agreement to consider whether or not
to sign this Agreement.
22. Effective Date. This Agreement shall not be effective until eight (8)
---------------
days from the date of execution of this Agreement by Employee (the "Effective
Date"). During the seven days following his execution of this Agreement,
Employee may notify Company in writing of his revocation of this Agreement.
23. Employee's Right to Consult Counsel. Employee is advised to consult
-------------------------------------
with Employee's attorney before deciding whether or not to sign this Agreement.
24. Parties in Interest. Except as expressly provided to the contrary
--------------------
herein, this Agreement shall be binding upon each successor to, and assign of,
the parties, and inure to the benefit of each permitted successor to, and assign
of, the parties.
25. Definitions. Capitalized terms herein shall have the meanings set forth
----------
below.
(a) "After Tax Equivalent" means, with respect to the value of a benefit
under a Benefit Plan that is tax free or tax deferred, the amount necessary to
replace the value of such benefit after the tax effect on Employee, assuming a
50% effective tax rate. For example, if Employee were not able to receive a tax
deferred allocation of $1,000 in a Benefit Plan that was a defined contribution
plan, the After Tax Equivalent would be $2,000 payable in taxable form to
Employee (on the assumption at least $1,000 net of taxes would be generated
which Employee could choose to deposit in a deferred annuity). Similarly, the
After Tax Equivalent of a tax deferred defined benefit future accrual would be
twice the lump sum present value of the accrual at the time the accrual would
otherwise have occurred using plan actuarial assumptions.
(b) "Applicable Withholding" means the sum of (i) required Federal, state
and local payroll and income tax withholding and (ii) withholdings for
employee-side contributions pursuant to the terms of Benefit Plans.
(c) "Benefit Plan" means all of the Unocal employee benefit plans (as
defined in Section 3(3) of ERISA), programs or fringe benefit arrangements or
payroll practices in effect at the Companies on October 14, 1997, any amendment,
modification, restatement or successor to same, and any other "employee benefit
plans" as defined in Section
17
<PAGE>
3(3) of ERISA or fringe benefit programs established by the Companies during the
term of Employee's employment described in Section 2(a) in which the Chief
Financial Officer of Unocal is eligible to participate.
(d)"COBRA" means the health care continuation provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1986.
(e) "Confidential Information" has the meaning assigned by Section 5.
(f) "Effective Date" has the meaning assigned by Section 21.
(g) "LTIP" means the Long Term Incentive Compensation Plan forming a part
of the Unocal Corporation Management Incentive Program.
(h) "Non-Qualified Retirement Plans" means the Unocal Retirement
Supplementary Compensation Plan and the Unocal Supplemental Retirement Plan for
Key Management Personnel.
(i) "RICP" means the Revised Incentive Compensation Plan forming a part of
the Unocal Corporation Management Incentive Program.
18
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed in duplicate
originals.
UNION OIL COMPANY OF CALIFORNIA EMPLOYEE
By: /s/ DENNIS P.R. CODON By: /s/ NEAL E. SCHMALE
--------------------- -------------------
Dennis P.R. Codon Neal E. Schmale
- ----------------- ---------------
Print Name Print Name
November 14, 1997 November 14, 1997
- -------------------------- --------------------------
Date Date
UNOCAL CORPORATION
By: /s/ DENNIS P.R. CODON
---------------------
Dennis P.R. Codon
- -----------------
Print Name
November 14, 1997
- --------------------------
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11.1
UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE ASSUMING NO DILUTION
For Three Months For the Nine Months
Ended September 30 Ended September 30
------------------------------------------------
Dollars and shares in thousands, except per share amounts 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
per share assuming no dilution (a)
<S> <C> <C> <C> <C>
Earnings from continuing operations ............................. $ 176,856 $ 133,517 $ 520,966 $ 452,815
Preferred stock dividend ........................................ -- -- -- (17,938)
Non-cash charge related to exchange of preferred stock .......... -- (54,246) -- (54,246)
------------------------------------------------
Earnings from continuing operations
applicable to common stock ................................ 176,856 79,271 520,966 380,631
Weighted average common stock outstanding ....................... 247,367 248,668 249,153 248,211
------------------------------------------------
Earnings from continuing operations
per common share ....................................... $ 0.71 $ 0.32 $ 2.09 $ 1.54
------------------------------------------------
Earnings (loss) from discontinued operations
per share assuming no dilution (a)
Earnings (loss) applicable to common stock ...................... $ -- $ 37,247 $ (44,243) $ 80,091
Weighted average common stock outstanding ....................... 247,367 248,668 249,153 248,211
------------------------------------------------
Earnings (loss) from discontinued operations
per common share ....................................... $ -- $ 0.15 $ (0.18) $ 0.32
------------------------------------------------
Loss from extraordinary item
per share assuming no dilution (a)
Early extinguishment of debt ................................. $ -- $ -- $ (37,820) $ --
Weighted average common stock outstanding ....................... 247,367 -- 249,153 --
------------------------------------------------
Loss from extraordinary item
per common share ....................................... -- -- (0.15) --
------------------------------------------------
Net earnings per common share
assuming no dilution ............................. $ 0.71 $ 0.47 $ 1.76 $ 1.86
------------------------------------------------
<FN>
(a) The dilutive effect of common stock equivalents is less than 3 percent for
the three and nine months ended September 30, 1997 and 1996
</FN>
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 11.2
UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE ASSUMING FULL DILUTION
For Three Months For the Nine Months
Ended September 30 Ended September 30
-----------------------------------------------
Dollars and shares in thousands, except per share amounts 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
per share assuming full dilution
<S> <C> <C> <C> <C>
Earnings from continuing operations ............................. $ 176,856 $ 133,518 $ 520,966 $ 452,815
Distribution on convertible preferred securities (net of tax) ... 5,952 1,720 17,858 1,720
Non-cash charge related to exchange of preferred stock .......... -- (54,246) -- (54,246)
-----------------------------------------------
Earnings from continuing operations
applicable to common stock ................................. 182,808 80,992 538,824 400,289
Weighted average common stock outstanding ....................... 247,367 248,668 249,153 248,211
Dilutive common stock equivalents ............................... 2,444 2,162 2,342 1,917
Conversion of preferred stock ................................... -- 431 -- 431
Conversion of preferred securities (a) .......................... 12,262 12,264 12,262 12,264
-----------------------------------------------
Weighted average common stock and
stock equivalents outstanding ............................... 262,073 263,525 263,757 262,823
-----------------------------------------------
Earnings from continuing operations
per common share ...................................... $ 0.70 $ 0.31 $ 2.04 $ 1.52
-----------------------------------------------
Earnings (loss) from discontinued operations
per share assuming full dilution
Earnings (loss) applicable to common stock ...................... $ -- $ 37,247 $ (44,243) $ 80,091
Weighted average common stock outstanding ....................... 247,367 248,668 249,153 248,211
Dilutive common stock equivalents ............................... 2,444 2,162 2,342 1,917
Conversion of preferred stock ................................... -- 431 -- 431
Conversion of preferred securities (a) .......................... 12,262 12,264 12,262 12,264
-----------------------------------------------
Weighted average common stock and
stock equivalents outstanding ............................... 262,073 263,525 263,757 262,823
-----------------------------------------------
Earnings (loss) from discontinued operations
per common share ...................................... $ -- $ 0.14 $ (0.17) $ 0.31
-----------------------------------------------
Loss from extraordinary item
per share assuming full dilution
Early extinguishment of debt ................................. $ -- $ -- $ (37,820) $ --
Weighted average common stock outstanding ....................... 247,367 248,668 249,153 248,211
Dilutive common stock equivalents ............................... 2,444 2,162 2,342 1,917
Conversion of preferred stock ................................... -- 431 -- 431
Conversion of preferred securities (a) ......................... 12,262 12,264 12,262 12,264
-----------------------------------------------
Weighted average common stock and
stock equivalents outstanding ............................... 262,073 263,525 263,757 262,823
-----------------------------------------------
Loss from extraordinary item
per common share ...................................... $ -- $ -- $ (0.14) $ --
-----------------------------------------------
Net earnings per common share
Assuming full dilution .............................. $ 0.70 $ 0.45 $ 1.73 $ 1.83
-----------------------------------------------
<FN>
(a) The effect of assumed conversion of preferred stock is antidilutive for the
nine months ended September 30, 1997.
</FN>
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 12.1
UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the Nine Months
Ended September 30
-------------------
Millions of dollars ........................................ 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Earnings from continuing operations ........................ $ 521 $ 453
Provision for income taxes ................................. 68 284
-------------------
Earnings subtotal ................................. 589 737
Fixed charges included in earnings:
Interest expense ........................................ $ 147 $ 215
Distribution on convertible preferred securities ........ 24 2
Interest portion of rentals ............................. 21 31
-------------------
Fixed charges subtotal ............................ 192 248
Earnings from continuing operations
available before fixed charges .......................... $ 781 $ 985
-------------------
Fixed charges:
Fixed charges included in earnings ...................... $ 192 $ 248
Capitalized interest .................................... 26 9
-------------------
Total fixed charges ............................... $ 218 $ 257
-------------------
Ratio of earnings from continuing operations
to fixed charges ........................................ 3.6 3.8
-------------------
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 12.2
UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
For the Nine Months
Ended September 30
-------------------
Millions of dollars 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Earnings from continuing operations ........................ $ 521 $ 453
Provision for income taxes ................................. 68 284
-------------------
Earnings subtotal ................................. 589 737
Fixed charges included in earnings:
Interest expense ........................................ 147 215
Distribution on convertible preferred securities ........ 24 2
Interest portion of rentals ............................. 21 31
-------------------
Fixed charges subtotal ............................ 192 248
Earnings from continuing operations available before
fixed charges and preferred stock dividends ............. 781 985
-------------------
Fixed charges:
Fixed charges included in earnings ...................... 192 248
Capitalized interest .................................... 26 9
Preferred stock dividends (before-tax basis) ............... -- 29
-------------------
Total fixed charges and preferred stock dividends . $ 218 $ 286
-------------------
Ratio of earnings from continuing operations to combined
fixed charges and preferred stock dividends ............. 3.6 3.4
-------------------
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 12.3
UNION OIL COMPANY OF CALIFORNIA AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the Nine Months
Ended September 30
-------------------
Millions of dollars 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Earnings from continuing operations ........................ $ 548 $ 456
Provision for income taxes ................................. 68 284
-------------------
Earnings subtotal .................................... 616 740
Fixed charges included in earnings:
Interest expense ........................................ 147 215
Interest portion of rentals ............................. 21 31
-------------------
Fixed charges subtotal ............................... 168 246
Earnings from continuing operations
available before fixed charges .......................... 784 986
-------------------
Fixed charges:
Fixed charges included in earnings ...................... 168 246
Capitalized interest .................................... 26 9
-------------------
Total fixed charges .................................. $ 194 $ 255
-------------------
Ratio of earnings from continuing operations
to fixed charges ....................................... 4.0 3.9
-------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Unocal Corporation FDS
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 516
<SECURITIES> 0
<RECEIVABLES> 846
<ALLOWANCES> (33)
<INVENTORY> 154
<CURRENT-ASSETS> 1,561
<PP&E> 14,551
<DEPRECIATION> (9,863)
<TOTAL-ASSETS> 7,457
<CURRENT-LIABILITIES> 975
<BONDS> 2,078
0
0
<COMMON> 252
<OTHER-SE> 2,153
<TOTAL-LIABILITY-AND-EQUITY> 7,457
<SALES> 4,272
<TOTAL-REVENUES> 4,507
<CGS> 2,692
<TOTAL-COSTS> 3,918
<OTHER-EXPENSES> 165
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 147
<INCOME-PRETAX> 589
<INCOME-TAX> 68
<INCOME-CONTINUING> 521
<DISCONTINUED> (44)
<EXTRAORDINARY> (38)
<CHANGES> 0
<NET-INCOME> 439
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.73
</TABLE>
